In the name of Science

"Climate Feedback" has produced a "scientific review" of my WSJ oped with David Henderson on (Oped ungated full text here, see also associated blog post.)

In the blog post, I wrote,

"If it is not clear enough, nothing in this piece takes a stand on climate science, either affirming or denying current climate forecasts. I will be interested to see how quickly we are painted as unscientific climate-deniers."

Now we know the answer. 

To recap, the oped said nothing about climate science, nothing about climate computer model forecasts, and did not even question the integrated model forecasts of economic damage. We did not deny either climate change nor did we argue against CO2 mitigation policies in principle. For argument's sake we granted a rather extreme forecast (level of GDP reduced by 10% forever) of economic costs. We did not even question the highly questionable cost-benefit analyses of policies subject to cost benefit analysis. We mostly complained about the lack of any cost benefit analysis, and the quantitative nonsense of many claims.

So, it's curious that there could be any "scientific" review of a purely economic article in the first place. How do they do it? 

Aaron Bernstein, Associate Director of the Center for Health and the Global Environment, Boston Children’s Hospital, Harvard: writes 

"Although many claims in this op-ed don’t mesh with reality, [no example stated] the most concerning delusion presented is that the health costs of climate change are both known and manageable. Legitimate economic analyses have put the costs of climate change at 2100 to GDP at several percent to more than 20%[1], with the variability largely due to different discount rates." 

We did not say known. We cited estimates, which have standard errors. We cited 10% of the level of GDP, forever. The response cites the discounted cost of all future GDP loss, in terms of one year's  GDP. Our number is much larger. 10% of GDP forever has a discounted value of 10%/(interest rate - growth rate). If interest rate - growth rate is one percentage point, then 10% of GDP forever is worth 10 times annual GDP, 1000% a lot more than 20%. If we took his number, total discounted costs only 20%, then climate change would truly be trivial. Even if he were answering our 10% with 20%, a factor of two is couch change in this business. OK, two tenths of a percentage point of growth.

(The quote is only about losses up to 2100, so you don't get the full r-g effect, but you see the point -- apples to oranges. The lesson is don't divide a present value by one year's flow. The discounted costs are an even larger fraction of a minute's GDP.)  

Bernstein  continues: 

"Even these higher damage estimates may fail to capture the full costs of extreme events over time, as Martin Weitzman’s work has shown. But there’s another, and more difficult, rub. What if we don’t understand the full consequences of greenhouse gas emissions? "

and continues with a standard list of things that might go wrong. We had written, 

"... some advocate that we buy some “insurance.” Sure, they argue, the projected economic cost seems small, but it could turn out to be a lot worse. "

and addressed the issue. 

"Science" and "scientific" review is supposed to include the ability to read and basic quantification. 

David Easterling, Chief of the Scientific Services Division, NOAA's National Climatic Data Center writes:

"This is a very simplistic, almost naive op-ed on climate change impacts." ...

It wasn't an oped on climate change impacts. It was an oped on cost-benefit analysis of policies to address climate change impacts, and never questioned any climate change impacts. 

"The idea that Miami is going to build a dike like Rotterdam is almost laughable. Of course climate change is not the only risk to society, but it is the biggest environmental risk. And most large buildings (e.g. Empire State Building) are not rebuilt every 50 years, only smaller, more expendable ones are."

Just why is building dikes, or other adaptations laughable? Miami is 7 feet above sea level, Rotterdam about the same below sea level, and 7 is greater than most estimates of sea level rise. Rotterdam did it. Climate change is the biggest environmental risk? More than nuclear war, chemical pollution, the crap in the water that most people in the world drink, malaria, loss of habitat, poaching, all put together? A citation or two comparing climate change to the others would be nice. And the total value of smaller more expendable buildings is far larger than the total value of Empire State buildings. 

Easterling falls neatly into our trap. We accused the politicized climate policy community for leaving quantitative, cost-benefit policy analysis behind and he... leaves quantitative cost benefit policy analysis behind.  

Frank Vöhringer, Dr. rer. pol, Scientist, Ecole Polytechnique Fédérale de Lausanne (EPFL), 

"The article plays down impacts of climate change that most studies consider to be highly important: e.g. the death toll of heat waves, hazards to coastlines, costs and friction of migration and other adaptation.... economic studies suggest that the risks of climate change are important, especially in certain economic segments (e.g. agriculture, health) and for low income countries with low capacity for adaptation. The article fails to mention that hazards and distributive issues of climate change increase all the other risks that the authors itemize, “nuclear explosions, a world war, global pandemics, crop failures and civil chaos”, even if it is not yet clear to what extent."

Verena Schoepf, Research Associate, The University of Western Australia, 

"The authors seem unaware of many consequences of climate change, particularly related to the ocean. The increase in ocean acidity and temperature, due to uptake of atmospheric CO2, will have tremendous consequences for many marine organisms and thus ultimately humans via sea level rise, impacts on weather and climate, food security, etc."

Wolfgang Cramer, Professor, Directeur de Recherche, Mediterranean Institute for Biodiversity and Ecology (IMBE) continues in the same vein.  

This is all simply untrue. We didn't "play down" any costs, and certainly not "economic studies," which we fully acknowledge. We do take for granted all the scientific, computer modeling and economic model estimates (though there is plenty to argue with there, but that's for another day). Nothing in the oped questions any of this. And "fails to mention" has to respect our limits: the WSJ gives us 900 words. We can't mention everything. 

Moreover, we acknowledge and consider

"Yes, the costs are not evenly spread. Some places will do better and some will do worse...."

We acknowledge and consider that

"Migration is costly. But much of the world’s population moved from farms to cities in the 20th century...."  

Not bad for 900 words.

Wolfgang Cramer, Professor, Directeur de Recherche, Mediterranean Institute for Biodiversity and Ecology (IMBE) continues, but I'm running out of steam. You get the idea.

Bottom line

Our main charge for the climate-policy community was, 

"Scientific, quantifiable or even vaguely plausible cause-and-effect thinking are missing from much advocacy for policies to reduce carbon emissions. "

climatefeedback.org has nicely illustrated exactly such flights from scientific, quantifiable, or even vaguely plausible cause and effect thinking. Notice not one counterexample in my quotes or the whole post. Along with a striking inability to read, and a fascinating will to put words in people's mouths that aren't there.

Let me offer a little "scientific review" of this "scientific review." N=5 is a small data sample. There is this little concept called "selection bias." Offering highly interested people a chance to blast an oped is not a "scientific review."

Blogging, opedding, publishing your political opinions is what democracy and free speech are all about. Just don't call it "science." 

Like most people, I revere "science." Its dispassionate quest for the truth has brought us unimagined prosperity. But, dear climate policy "scientists," be careful,  if you are going to invoke the imprimatur of "science" you had darn well better be right. If you end up saying "never mind," as the food establishment has done with the 1970s advice to eat margarine and sugar instead of animal fats, the public prestige of science, and all the good for policy it has brought, will come crashing down. You will be treated no more seriously than economists. And that will be a great tragedy. The fact that you are using such unscientific method in your policy analysis is an early warning sign.

I wrote to the climatefeedback editor, requesting that they post a link to this response on their "review." It will be an interesting test of what ethics remain part of "science" to see if they do that, or answer my email.

Update: climatefeedback answers, in the true spirit of dispassionate transparency that "science" demands:

Hello John,
Thank you for reaching out. We could agree to add a link in our review acknowledging
 your reply; we only require that The Wall Street Journal adds a link to our review from your article.
Thank you,
Emmanuel Vincent

I replied with a guffaw. Grumpy enjoys good snark as much as the next person. I invited them to post a comment at WSJ, which at least WSJ allows and climatefeedback does not ("feedback" does not even include comments), and allow me to post a comment at their site.

I also pointed out that the Wall Street Journal oped page is explicitly an opinion page, while they pretend to be a page of "scientific review." In the old days "science" publications were not opinion, and operated by greater standards of transparency and openness. (Though, not only through comments and letters, even the WSJ opinion page would publish a response such as mine. Editors have contacted me in the past with several inquiries about my articles.)

Not allowing a criticized author a link to a response, forget about posting the response itself, is way out of the bounds of "scientific" ethics. Proof again that the name of "science" is taken in vain here. 

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Tax Reform Again

A Wall Street Journal oped on tax reform. This complements an earlier oped and see the tax link at right for many others.

The bottom line: I argue for a national VAT instead of (and that is crucial) individual and corporate income taxes, estate taxes, and anything else.

Why? I want to break out of our stale argument. "Lower taxes to boost the economy"  vs. "you just want tax cuts for the rich." It's not going to go anywhere.

I also want to break out of the process. Proposing cuts within the current structure of the tax code, even if proposing them with offsetting cuts in deductions, leads naturally right back to the mess we're in.

Once you tax income much of the rest of the mess follows inexorably.  If we go back to the beginning, and tax spending not income, so much mess vanishes.

Once the government taxes income, it must tax corporate income or people would incorporate to avoid paying taxes. Yet the right corporate tax rate is zero. Every cent of corporate tax comes from people via higher prices, lower wages, or lower payments to shareholders. And a corporate tax produces an army of lawyers and lobbyists demanding exemptions. 

An income tax also leads to taxes on capital income. Capital income taxes discourage saving and investment. But the government is forced to tax capital income because otherwise people can hide wages by getting paid in stock options or “carried interest.”
The estate tax can take close to half a marginal dollar of wealth. This creates a strong incentive to blow the family money on a round-the-world cruise, to spend lavishly on lawyers, or to invest inefficiently to avoid the tax. 

Today’s tax code tries to limit this damage with a welter of complex shelters: 401(k), 526(b), IRA, HSA, deductions for corporate investment, and complex real-estate and estate-tax shelters. Taxing something and then offering complex shelters is a sure sign of pathology. But by taxing cars, houses and boats when people or companies buy them, all this complexity can be thrown out. With a VAT, money coming from every source—wages, dividends, capital gains, inheritances, stock options and carried interest—is taxed when it’s spent. [I left out the whole mess of corporate investment deductions and credits, plus foreign income. All vanishes with a VAT.]

A reformed tax code should involve no deductions—including the holy trinity of mortgage interest, employer-provided health insurance, and charitable deductions. The interest groups for each of these deductions are strong. But if the government doesn’t tax income in the first place, these deductions vanish without a fight.

Zero is important. Eliminating the personal income, corporate income and estate taxes is important. Taxes are like zombies. If you just reduce the rates but leave the taxes in the code, they come back.  And all the deductions, exclusions, credits and the rest come back too. If we just compromise for a VAT in exchange for lower individual and corporate rates, we really will end up at European levels of taxes -- 20%+ VAT, 50% income tax, 20-40% payroll tax, 40%+ estate taxes.

BTW, I should be clear what a VAT is. You pay the VAT, say 20%, on everything you buy. It's collected by the seller. You collect the same VAT on everything you sell, but you may deduct the VAT you have paid on your purchases. If I am in charge, period. Notice this gives people an incentive to collect the VAT.

In this way, a VAT is, in fact, something of a corporate tax, and is largely "paid by" corporations. But it does not distort rates of return as much. More importantly, it is clearer, more transparent, and allows us to throw out the mess of the corporate tax code. The border-adjusted corporate tax reform was sold as a step towards a VAT, and it was -- if you have a PhD in economics to figure that out -- though it retains all the special deductions and carve outs of the corporate tax code. We need a tax that the average voter can understand, and a clean slate.

A second theme of this oped, though for lack of space less visible: Tax reform is stalled because we try to do too much. We try simultaneously to

1) Raise revenue for the government
2) Redistribute income to people with lower incomes
3) Redistribute income to homeowners, electric car drivers, farmers, etc. etc. etc. (Despite the hullabaloo about income redistribution, there is a lot more of this)
4) Redistribute income away from "the rich"
5) Subsidize various activities and industries. Practically all of them. (We simultaneously tax, subsidize, regulate and promote most industries.)
6) Arguments about the structure of the tax code are mixed up with arguments about tax rates, the overall level of taxes, the overall level of spending.

Really, the current discussion is disheartening to an economist, who sees taxes as a necessary evil to raise revenue for the government, to be done with the lowest marginal rates and lowest distortions possible.  The current discussion, entirely on the left and mostly on the right, sees taxes pretty much only as an instrument of redistribution to one or another class.

Eliminating the income tax in favor of a uniform VAT, leaving the rate blank, lets us fix the structure of the tax code without getting sidetracked with all these other issues.

What about progressivity and redistribution? The oped explains briefly how to make a VAT progressive, if that's what you want. The idea is explained more at length in an earlier post. Briefly, you get a rebate for VAT on your first $10,000 of expenditures, half on the next $10,000 and so on. The rebate can happen instantly, like a giant rewards program for debit cards.

But it is becoming clearer to me that our redistribution system is just as chaotic as our tax system. A major observation: Why should every measure be assessed for its redistribution in isolation? For example, a major complaint on the left on the corporate income tax is the idea that corporate taxes end up being paid by shareholders, which are rich people, so it's redistributive. I don't think the fact is right -- corporate taxes are paid more by higher prices and lower wages, and we're all shareholders through our pension funds. But even if we admit the fact, that's a bloody inefficient way to achieve redistribution. The entire corporate tax, with all its shenanigans, exists to try to get more money out of shareholders? Just tax them directly! Get your redistribution elsewhere, and not this way.

So, the thought touched on in the oped: We need at least a comprehensive measure of redistribution, and much more fine-grained than just across income categories. We could have a much flatter tax code if we had a more aggressive social welfare state, no? We should be able to trade these things off, getting better taxes and more effective redistribution, to people who really need the money.

Both points are part of a more general point. We have become obsessed with income, both in taxation and in redistribution. America is becoming a class society with class defined by income. So many social programs treat income the way India used to treat caste. But income is a terrible measure, with little economic meaning. My mid 20's children are "low income." Consumption is a far better measure. And in terms of who deserves taxpayer funded help, we can think of a hundred characteristics that matter -- disability status, say -- much more than income. The income tax and vast amount of redistribution that happens on income alone is reinforcing this. Tax people by what they spend.

Related, a standard objection to the VAT is that it is "regressive." Poor people spend a larger fraction of their incomes, so in a flat VAT they will pay more of their income in tax. First, I answer that with the progressive VAT. But more deeply, why should progressivity be measured as a fraction of income which has little economic meaning, rather than as a fraction of consumption  in the first place? If I leave my income invested for others to use it to build factories, why tax that? Yes, I will be richer in the future, and we will tax that when and if I spend it. If I never spend it... well, good for me. Annual income is just not a particularly useful economic concept.

There are lots of other almost as good ways to implement a consumption tax. The Hall-Rabushka Flat Tax is one, various proposals to implement a progressive consumption tax via the current income tax mechanism is another. My VAT shares a lot with the Fair Tax proposal to replace the income tax with a national sales tax. But reflecting on it, I like the finality of not even measuring income any more. Remember the zombies. And a VAT works better than a sales tax.

However, the VAT is not a pure consumption tax, and I'm not persuaded it needs to be. (The title is a bit misleading, but I don't get to pick oped titles.) I would tax investment goods at the same rate as consumption goods. If not, then a lot of shenanigans will erupt trying to define what's an investment good and what is a consumption good. Is the corporate Ferrari a "investment?" A real corporate investment, like real corporate purchases of VAT taxed inputs, will yield profitable goods, and the VAT paid on investment can be deducted on the sale of those goods. Yes, it will be a few years later, but if the investment is worthwhile the profits should be larger if they come later. Yes, it's not as pure, but it's close -- we avoid the chaotic capital taxation of today, and we avoid trying to make a distinction between investment goods and consumption goods. Everyone pays the VAT. Everyone.

Please don't bother to comment that we can't have a VAT because the politicians will just add back the income tax.  I know the argument. If our country cannot legislate "we put in a VAT, we eliminate the income tax, and that's it," then democracy is doomed already.

As usual, full text in 30 days, or get creative with your Googling.

Update:  I learned of a precedent for the progressive VAT idea, Yaacobi Nir, "Progressive V.A.T. as a Substitute for Income Tax" December 2008

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Growth full oped

Source: Wall Street Journal

On November 7 I wrote "Don't believe the economic pessimists," an oped about growth in the Wall Street Journal. Now that 30 days have passed, I can post the whole thing here. pdf here (my webpage).

Don't Believe the Economic Pessimists

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming. “Secular stagnation” or “hysteresis” account for slow growth. Prosperity demands more borrowing and spending—even on bridges to nowhere—or deliberate inflation or negative interest rates. Others advocate surrender. More growth is impossible. Accept and manage mediocrity.

But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure. The U.S. economy suffers from complex, arbitrary and politicized regulation. The ridiculous tax system and badly structured social programs discourage work and investment. Even internet giants are now running to Washington for regulatory favors.

If you think robust growth is impossible, consider a serious growth-oriented policy program—one that could even satisfy many of the left’s desires.


• Taxes. The ideal tax system raises revenue for the government while distorting economic decisions as little as possible. A pure tax on consumption, with no corporate, income, estate, or other taxes is pretty close to that ideal.

The U.S. tax system is the opposite: By exempting lots of income, the government raises relatively little money. Yet an extra dollar is heavily taxed, greatly lowering incentives and encouraging people to find or create exemptions. This massive complexity and obscurity undermine faith in the system.

Progressives, ponder this: With a sales tax of only 25%, the government would likely have gotten a lot more money from Donald Trump—who has employed complex but legal tax-avoidance schemes—than it did by purporting to tax income at high rates.

• Regulation. U.S. regulation is arbitrary, slow, discretionary and politicized. Speak out on the wrong side of the party in power and some federal agency will be after you.

Imagine a deep rule-of-law regulatory reform, along the lines proposed by House Speaker Paul Ryan’s “Better Way” plan. Congress must review and approve major regulations. People and businesses have a right to see evidence and appeal. Regulators face a shot clock—no more years and years of delays on decisions. Agencies must conduct serious, transparent and retrospective cost-benefit analysis.

Imagine a similar deep reform of state and local restrictions including zoning laws and occupational-licensing regulations.

• Social programs. When many people earn an extra dollar, they lose more than a dollar of benefits. If we fixed these disincentives, more Americans would work—and fewer would need benefits.

• Health. Replace ObamaCare with a simple health-insurance voucher. Deregulate insurance and entry into health care dramatically.

• Finance. Replace strangling regulation of financial companies with a simple rule: If you issue enough equity that stockholders bear the risks, you can do what you want. Rep. Jeb Hensarling has proposed such legislation. Hearty competition is the best consumer protection.

• Labor. The best worker protection is a worker’s ability to swiftly change jobs. This is more likely if employers do not face a mountain of red tape, complex rules and legal liability.

• Immigration and trade. The politically incorrect truth: Allowing Americans to buy from the best supplier and permitting people who want to work and start businesses to immigrate is good for the economy. Trying to impoverish China will not revive America.

• Education. Let lower-income Americans get a decent education from charter schools and vouchers.

• Energy. Trade all the crony subsidies and credits and regulations for a simple uniform revenue-neutral carbon tax. The country will have more growth and less carbon.

It would take an entrenched obtuseness to claim such a program cannot substantially improve economic output and incomes. If you claim such good policy cannot help, then it follows that bad policies do not hurt. Nativism, trade barriers, overregulation, legal capture, high taxes, controlled markets and people excluded from work won’t hurt our slow but positive growth. Don’t give populists cover to try it again.

If you object that such good policy is politically infeasible, then you at least grant that robust growth is economically possible. And small steps help. Current bipartisan proposals to reform taxes, Social Security, immigration, the regulatory state and trade agreements would go a long way to reviving growth. Have a bit more faith in democracy.

On the other hand, the major party presidential candidates’ signature plans—child-care tax credits, college subsidies, higher taxes on people who don’t hire good enough lawyers; threatening a trade war and deporting millions of unauthorized immigrants—cannot revive substantial growth.

So why is there so little talk of serious growth-oriented policy? Regulated and protected industries and unions, and the politicians who extract support from them in return for favors, will lose enormously. The global policy elite, steeped in Keynesian demand management for the economy as a whole, and microregulation of individual businesses, are intellectually unprepared for the hard project of “structural reform”—fixing the entire economy by cleaning up the thousands of little messes. Even economists fight to protect outdated skills.

Mr. Cochrane is a senior fellow of the Hoover Institution and an adjunct scholar of the Cato Institute.

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Don't Believe the Economic Pessimists

Source: Wall Street Journal

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming...

Keep reading here, the Wall Street Journal Oped. I'll post the whole thing in 30 days as usual.

Somehow the WSJ thinks anyone is interested in growth and serious policy on the eve of the election. Or maybe they were just tired of Trump vs. Clinton and needed to fill space.  At any rate, it might give you a little reprieve from the election coverage.

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